Barney Frank Says Fannie And Freddie's Lending Standards Are Too High

Of all the things you could say about Fannie Mae (FNM) and Freddie Mac (FRE), too-strict lending standards probably wouldn't come to mind.

Afterall, the companies have been backstopped to the tune of $400 billion, which has to mean their standards were too loose.

But powerful Congressman Barney Frank, in a desperate attempt to reflate the old bubble, says the two GSEs are being too stingy, particularly with respect to condos.

WSJ: Fannie and Freddie have restricted loans to condo buyers in these situations because they represent a red flag that the developments -- many of which were planned and built at the height of the housing bubble -- may face financial trouble down the road. But never mind all that. Messrs. Frank and [Congressman Anthony] Weiner think, in all their wisdom and years of experience underwriting mortgages, that the new rules "may be too onerous."

And in a display of the wit for which Mr. Frank is famous, the letter writers slyly point out that higher lending standards won't reduce taxpayer exposure to bad loans because the Federal Housing Administration has even lower standards for condos. "While the underlying goal may be to reduce taxpayer exposure relating to the current conservatorship of the GSEs [government sponsored entities], such a goal would not have such an effect if it merely results in a shifting of loans from the GSEs to the FHA." Tougher lending standards will merely shift market share from one government program to another, so what's the point in being cautious?

That is clever reasoning, and we could accept the idea that such a move wouldn't increase the government's net exposure at this point. But that's not really the point -- the point is that the government only knows how to turn the wrench in one direction -- it's always loosening, loosening and loosening, whether it's the money supply or lending standards.

You often hear about Bernanke's conundrum -- how he'll "land the plane" and know when to tighten -- but the Congress is in the same boat with all their lending schemes. At one point do these agencies return to normal, and would that be even possible when their political god-parents only want them to go in one direction?